Yahoo Finance What You Need To Know About Orora Limited’s (ASX:ORA) Cash Situation
Two important questions to ask before you buy Orora Limited (ASX:ORA) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine ORA’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
View our latest analysis for Orora
What is Orora’s cash yield?
Orora’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Orora to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Orora’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Orora’s yield of 3.53% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Orora but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Orora?
Can ORA improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a single-digit rate of 7.84%, increasing from its current levels of AU$334.90m to AU$361.15m in two years’ time. Furthermore, breaking down growth into a year on year basis, ORA is able to increase its growth rate each year, from -1.76% next year, to 9.77% in the following year. The overall future outlook seems buoyant if ORA can maintain its levels of capital expenditure as well.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Orora becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Orora to get a more holistic view of the company by looking at:
Valuation: What is ORA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ORA is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Orora’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
